Baroness Lea of Lymm: My Lords, I was very encouraged by last week’s Autumn Statement and welcomed the policy changes, while recognising the Chancellor’s limited room for manoeuvre. However, before discussing these policy changes, I would like to put the Autumn Statement into some sort of economic context.
All too often, two recent, seismic economic events are overlooked or regarded as history, but their legacies still cast major shadows over the economy and inevitably restrict the Chancellor’s room for manoeuvre. The first event was, of course, the economic lockdown associated with the pandemic. There was a huge cost to the Exchequer, which the National Audit Office estimates at nearly £380 billion. That is about 20% of GDP. That is absolutely enormous. Unsurprisingly, the debt to GDP ratio soared and this debt needs financing. Also, lockdown severely hit the labour market. According to the ONS, the figure for the economically inactive—people aged 16 to 64 who are not in work and not looking for work; so, anyone who is over 64 is let off—was over 410,000 higher in the three months to July 2020 than in the three months to February 2020, prior to lockdown. This helps to explain the current tightness of the labour market, which is a major supply problem.
The second event, of course, relates to the soaring energy prices following Russia’s invasion of Ukraine in February 2022. This was a major inflationary shock to the economy, at a time when inflationary pressures were already building up, reflecting supply-side disruptions after lockdown. Of course, the burst of inflation triggered a cost of living crisis and has undermined real personal disposable incomes significantly. Arguably rather late in the day, the Bank of England began to tighten interest rates. Interest rates of course hit mortgage holders, along with the higher RPI inflation that the public finances by significantly boosting debt interest payments.
Despite these seismic events, the economy has proved quite resilient. Granted, overall GDP growth since 2019 has been pretty weak but it has been similar to France’s and has exceeded Germany’s. It has been more resilient than was widely expected by major forecasting bodies. It is worth remembering that the Bank was still forecasting a two-year recession for 2023-24 as recently as February this year. However, anybody who has done any economic forecasting knows that it is not an exact science—or art, I do not know which. It is all the more difficult when the ONS revises the underlying data quite significantly, as it did in September with the GDP data. This is not to criticise the ONS—your Lordships would not expect me, as an ex-member of the Government’s statistical services, to do that—but it is an attempt to provide some context to the difficulties and uncertainties underlying the Autumn Statement.
I note that the OBR concluded in its Economic and Fiscal Outlook that:
“The economy has proved to be more resilient to the shocks of the pandemic and energy crisis than anticipated”
in March. It upgraded its forecast for 2023 but cautiously downgraded its overall growth projections for the forecast period—perhaps too cautiously.
Turning to the fiscal outlook, the OBR’s forecast reduced public sector borrowing quite significantly, as higher inflation boosts revenues more than spending. This provided the Chancellor with a windfall, which he largely used for some judicious tax cuts while sticking within his main fiscal targets. Do not forget those fiscal targets.
Turning to the policy measures, there were two major tax changes, both of which were very welcome. First, there was a package of reduction of national insurance contributions, including a 2p cut in the main employee rate and help for the self-employed. Secondly, full expensing of plant and machinery costs was made permanent in order to stimulate business investment and productivity, as already mentioned. Full expensing was initially reduced in the March Budget but only up to financial year 2025.
Given the aforementioned limited room for manoeuvre, the Chancellor understandably treated these two major sets of tax changes as his priorities, and I fully understand that. Suffice it to say that it is clear that he did not have the leeway to address two key tax issues which are very close to my heart, and which noble Lords have already alluded to. First, personal income tax thresholds are due to remain frozen at financial year 2021 levels, up to and including financial year 2027. These frozen thresholds increase the personal tax burden through fiscal drag, as stronger wage growth pushes more taxpayers into higher tax bands. Secondly, again as already mentioned, the Chancellor cut the main corporation tax rate from 25% back to 19%. As I said, I appreciate that his room for manoeuvre was very limited, especially as he had his eye on those key fiscal targets. However, it is instructive to note that, as already mentioned, the tax to GDP ratio will be increasing over the next five years to a post-war high of nearly 38% by financial year 2028. This is despite the tax cuts in the Autumn Statement. Perhaps, however, there might be further tax cuts in the Budget.
Finally, I note the Chancellor’s back-to-work plan, which he announced with the Secretary of State for Work and Pensions: getting people with sickness or disability, and the long-term unemployed, back into work. This is absolutely excellent, not least considering the substantial increase in the economically inactive compared with pre-lockdown, to which I referred earlier. Therefore, the plan must be welcomed. We must get these people, if they can work, back into work, and help the economy. All in all, it was an encouraging Statement, but let us be aware of the difficulties ahead.